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Small brokerage firms in Canada face a struggle for survival after a third straight year of falling earnings, says the head of the Investment Industry Association of Canada (IIAC).

Overall profit in the securities business rose 27 per cent to $4.8-billion last year, the association estimates. But almost all of that money went to the eight big integrated investment dealers, a group that mainly comprises the securities firms owned by big banks.

Those large firms have advantages in the current markets, among them the ability to lend and do bond deals. Boutique firms tend to depend mostly on helping smaller companies finance in equity markets, a business that has been in the dumps for more than two years.

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The result is "existential struggle faced by the 180 or so boutique firms saddled with chronic weak business conditions and poor earnings, a tough competitive landscape, and a heavy accumulating regulatory burden," IIAC head Ian Russell said in a letter to his membership, which includes all the main securities firms in the country.

The split is stark. Operating profits at the big firms, called "integrated" because they offer services at all levels of the market, have risen 43 per cent in the last five years. For Canadian boutique dealers, which focus on niches, earnings declined 67 per cent in the same period.

In the last year, some firms have simply given up, while others have trimmed staff. Employment in the boutique sector is down 6 per cent in the past year.

IIAC said that there is now $600-million less in capital held by domestic boutiques. That means less stability and deal-making ability because capital is the money that firms use to back transactions. The erosion is a result of losses and firms getting out of the business. It is likely to get worse, Mr. Russell said.

"Investment banking revenues for the institutional boutiques, cut by half in three years, could slide even further," he wrote. "In this environment, the institutional boutique sector will continue to retrench through consolidation, closure and migration of registration to the exempt dealer regime, restricting their business to accredited investors and institutions."

That will exacerbate what Mr. Russell called a "hollowing out" of firms as people leave and skills are lost.

Over all, there are now 192 brokerage firms of all types. That is down from 201 in 2011. Employment in the industry has fallen from 40,427 that year to 39,405 as of the end of the third quarter of 2013. (IIAC collects figures quarterly on industry performance. Its most recent is the third quarter. Fourth-quarter numbers are not final but the group is extrapolating.)

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